Alexander Minin participated in the round table “Challenges for the tax system of Ukraine during the war in the context of the EU-Ukraine cooperation”

On December 8, 2022, a round table was held by the Ukrainian Bar Association together with the Ukrainian European Studies Association.

Senior Partner of  Alexander Minin focused on two important issues in the context of the topic.

The first is the problem of inconsistency of the VAT system of Ukraine with the general VAT system of the European Union (“the EU”). This inconsistency has recently intensified, in particular on such a fundamental principle as the fiscal neutrality of VAT for business. The mentioned principle means that the business has to play the role of a tax agent – to collect and pay the VAT. Only the balance between what was received and what was transferred/charged in connection with the purchase should be paid. At the same time, the VAT transferred/charged in connection with the purchase must be deducted immediately, and this right cannot be limited. The negative balance is subject to quick and full refund. In Ukraine, these fundamental principles are being violated, and VAT becomes an economic burden specifically for business.

The tax authorities have possibilities for manipulation and interference in the VAT system, which they actively use (blocking the registration of tax invoices, illegal tax audits and delaying the budgetary VAT refund for illegitimate reasons) and significantly complicate the conduct of business for conscientious taxpayers during wartime. We would like to point out that according to the practice of the EU, a refusal to VAT refund is possible only if there is objective evidence that the taxpayer himself is a participant in tax fraud. In all other cases the VAT should be refunded automatically. Refusal of a tax credit or a budgetary VAT refund is a sanction according to the qualifications of the Court of Justice of the European Union (the CJEU). The CJEU decision in this regard is a constituent part of the definitions of the general EU VAT system.

Therefore, in the specified aspects, the legislation and practice of Ukraine on VAT do not correspond significantly to the mentioned fundamental principles of the general EU VAT system. These inconsistencies must be eliminated in view of Ukraine’s accession to the EU.

The second issue is the issue of double taxation of companies and citizens of Ukraine who were forced to leave Ukraine due to the military aggression of the Russian Federation against Ukraine.

In particular the risks of double taxation concern employees of Ukrainian companies who continue to receive salaries from Ukraine, entrepreneurs under the laws of Ukraine who are now actually operating abroad, and companies whose management is currently operating abroad and thus creates a risk of permanent establishment (as a place of management) there abroad with appropriate taxation of Ukrainian companies.

Attempts to resolve these issues centrally at the EU level have failed. This is still a matter for the national level. That’s why the “matrix of uncertainty” has appeared regarding these issues, which can be solved in different ways at the level of different EU member states.

In addition, there was an attempt by the Ukrainian government to address this at the level of the Organization for Economic Co-operation and Development (“the OECD”), which was called upon to issue formal clarification or recommendations similar to those issued during the crisis caused by the spread of COVID-19.

Although the OECD clarifications are not binding, they are still followed as certain guidelines on the application of the OECD Model Convention on the Avoidance of Double Taxation.

To summarize, Alexander Minin noted that these two issues require an urgent solution together with the EU through the introduction of new tools and mechanisms that meet the needs of the time as the agreements on avoiding double taxation do not correspond to the realities of life.